Barclays' notes tied to health care SPDR may appeal to moderate bulls in sector, sources say

By Emma Trincal

New York, Feb. 16 - Barclays Bank plc's plans to sell Super Track Notes linked to the Health Care Select Sector SPDR fund, an exchange-traded fund, may appeal to moderately bullish investors who believe that the sector has potential for moderate growth and who may want to benefit from leverage, sources said.

The 0% notes will be due Aug. 26, 2011, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus triple any fund gain, up to a maximum return of 14.8% to 18.4%. The exact cap will be set at pricing. Investors will be exposed to any losses.

The Healthcare Select Sector SPDR fund seeks to provide investment results that correspond to the price and yield performance of the Health Care Select Sector of the S&P 500 index.

Leverage and volatility

The underlying annualized volatility for this fund is 16.1%, according to structured products analyst Suzi Hampson at Future Value Consultants. "It's very low. You have triple leverage here. When you're expecting a small, moderate growth, leverage works in your favor. With that type of underlying, it's ideal to have a high-gear product," she said.

The fund generated a 14.8% return last year. In the year to date, the return has been flat at 0.23%.

Low beta

Alec Young, an equity strategist at S&P Equity Research, a division of Standard & Poor's, said, "The sector has a low beta. It is less volatile than the S&P 500. It goes down less and it goes up less. So it sounds interesting that you could triple the return. You pay higher fees than when investing directly in the fund, and you're also locked in since there is a lack of liquidity. But it looks like an interesting situation. It depends on the individual. If you believe that the sector is not going to go up that much, the leverage could work for you as long as the fund goes up."

The fees for the notes are 60 basis points. Comparatively, the ETF fees are 22 basis points.

Value play

Young said that one of the advantages of health care, as a sector, is that it's a "relatively cheap area, one of the cheapest in the market based on 2010 estimates earnings. It has reliable earnings. People believe the numbers."

But Young discounted the impact of health-care reform on stock prices, at least now.

"If the reform is on hold, Wall Street sees it as a positive for the sector. But it's not as big a driver as it was over the summer. The market has already priced in the possibility that the bill may be blocked," Young said.

While the cap limits upside returns, a source said that a cap of between 14.8% and 18.4% is "fair" for a sector that has low volatility.

"We're in a sideways market. If the market goes up, the health-care sector will go up less, but investors in the notes will do very well with a three times leverage," said Young.

Downside risk

"The risk is if the mark collapses. That's the biggest risk, and it's not an easy forecast to make for an 18-month period. If the deal had been a 12 months, it would have been a lot more interesting," said Young.

Given that the market as a whole may become more "choppy" in the next few months, health care, despite its relatively lower volatility, is not a risk-free sector, stressed Young.

"These notes are more of a speculative play. It should be a small part of the portfolio. Conservative investors or anyone who needs the money in the short term should not be looking at it," he said.

The notes will price on Feb. 23 and settle on Feb. 26.

Barclays Capital Inc. is the agent.

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